Performance

Question 1

What are the 4 indicators of economic performance, and how they are measured?

Answer 1

Economic growth (sustained) - real GDP/GNP
Price Stability - CPI, GPL
Full employment - Unemployment rate
Balance of Payments - BoP position

Question 2

What is the definition of GDP?

Answer 2

The value of all final goods and services produced within the geographical boundaries of a country during a given period of time

Question 3

What about the definition of GNP? Application to SG?

Answer 3

GDP + net factor from abroad, especially applicable to open economy like Singapore, since people work overseas, invest overseas - GNP value significantly larger than GDP value

Question 4

Formula for real GDP growth rate?

Answer 4

(Real GDP this year - Real GDP last year)/Real GDP last year * 100%

Question 5

Formula for real GDP?

Answer 5

Nominal GDP * (CPI base year/CPI current year)

Question 6

What are 2 implications of real GDP growth rate?

Answer 6

Rise in material Standard of Living

Increased output –> increased employment

Question 7

Relevance of real GDP per head to economic performance?

Answer 7

Proxy for productivity level

Question 8

Limitations of real GDP growth rate?

Answer 8

Does not accurately reflect consumption levels in a country: Does not account for non-market activities, does not account for underground economies

Question 9

What is price stability?

Answer 9

Low and stable inflation rate, measured with CPI –> GPL

Question 10

Definition of CPI?

Answer 10

Measures the price of a fixed basket of goods and services typically purchased by a typical household

Question 11

Formula for inflation rate?

Answer 11

(CPI this year - CPI last year)/CPI last year * 100%

Question 12

Implications of price stability?

Answer 12

Advantages: Lower Cost of Living, Indirect effect on performance, since high inflation encourages imports, discourages imports, X-M falls, affects confidence in economy, investment falls, thus AD falls –> affects growth negatively

Question 13

Limitations of CPI?

Answer 13

Substitution bias - CPI does not take into account consumers switching to less expensive substitutes when price of goods rises

New products - consumers have option of switching to new goods, spending less to maintain standard of living, but new products are not immediately included in fixed basket

Question 14

How is full employment measured?

Answer 14

Employment rate

Question 15

Definition of full employment

Answer 15

When all those who are able and willing to work have gained employment -
but unemployment rate need not be 0%, since frictional and structural employment can still occur

Question 16

Formula for unemployment rate?

Answer 16

Number of unemployed/labour force

Question 17

Implications of low unemployment/full employment?

Answer 17

If low -not likely to be cyclical unemployment. Economy is healthy. Low unemployment - maximises use of scarce resources - more production, higher actual growth

Question 18

Limitations of employment as an indicator

Answer 18

Limitations on SoL: Does not take into account dependents, jobs may go to foreign workers.
Change in unemployment rate may result from change in the size of the workforce
People discouraged, retire, go for training, stop looking for jobs and leave labour force. Lowers unemployment rate, but does not imply better utilization of resources

Question 19

Favourable Balance of Payments position - what is the definition of BoP?

Answer 19

A record of a country’s international transactions which involve flows of money between residents of a country and the rest of the world

Question 20

What is a favourable BoP position?

Answer 20

Avoidance of large/persistent BoP deficit, or improved BoP surplus

Question 21

What is in the current account?

Answer 21

Comprises trade balance and income balance
Trade balance - imports vs exports
Income balance - wages, interest, profits, transfers flowing in and out of the country

Question 22

What is in the capital account?

Answer 22

Records changes in ownership of assets - acquisition of overseas assets are recorded as credit items, acquisition of local assets by foreigners recorded as debit items. FDI, portfolio investment included

Question 23

Reserve assets account

Answer 23

Records international transactions made by the monetary authorities specifically for the purpose of financing the overall balance of the BOP. The official foreign reserves is the amount of foreign currencies held by the central bank.

Question 24

How to calculate BOP position?

Answer 24

CA - KA + Net errors and omissions

Question 25

Implications of BOP position?

Answer 25

If there is a deficit:
CA deficit - TR from X < T spending on M, X-M falls, AD falls, NY falls.

KA falls: FDI falls –> AD falls, NY falls

Overall Deficit –> exchange rate depreciates as demand for country’s currency falls, if keeps depreciating, loss of confidence, investment falls, NY falls